The US Federal Reserve’s has ultimately decided to keep interest rates unchanged in the latest meeting. Private banks respond to the outcome, especially with regard to the lack of clarity under the new chair Kevin Warsh.
Yesterday, the Federal Open Market Committee (FOMC) concluded with the decision to keep interest rates on hold at 3.50-3.75%. This was based on a vote of 9-3, with dissenters favoring a 0.25% rate hike.
The topic of Fed independence under new chair Kevin Warsh remains in play as President Donald Trump has repeatedly applied public pressure to keep rates low despite persistently elevated inflation. According to multiple private banks, the latest FOMC outcome did not do away with such concerns.
UBS GWM: “Audience of one”
According to Paul Donovan, UBS Global Wealth Management’s chief economist, the three dissents would have been a strong signal a few years ago but is today “more likely to reflect the culture of rebellion that has been building in recent meetings”.
“At the press conference, Warsh appeared to be speaking to several audiences at once. Suggesting that the Fed was accountable for inflation and that inflation would come down appeals to very much to an audience of one: US President Trump. If the Fed is accountable for inflation, it cannot be Trump’s fault,” he said in a note.
“Warsh directed comments towards US households, talking about household perceptions of the Fed’s inflation target. Polls suggest that a sizable majority of US households do not know that Federal Reserve is supposed to target inflation at all.”
The unchanged rate was in line with UBS’s expectations, though Donovan noted that “Warsh’s apparently deliberate fog of confusion around the policy framework means that the bond market is now more sensitive to Fed speeches”.
RBC WM: Another chance in September
In a separate note, RBC Wealth Management said it expected that the Fed would surprise markets with a rate hike, echoing the observation that inaction pushed 30-year Treasury yield to a 19-year high of 5.2%.
“We still think a rate hike was simply deferred this month and that the three dissenters could find more support among the Board of Governors in September. But whether Chair Warsh decides to go along with them could be the ultimate reveal of whether he is truly just a sheep in wolf’s clothing,” the bank added.
HSBC PB: Still positive despite communication issues
HSBC Private Bank also reiterated the challenges of investor perception that Fed policy lacked clarity under Warsh, but said that the positives outweigh such concerns, maintaining a mild overweight on US equities.
“Markets are increasingly being driven by incoming economic data rather than Fed forward guidance. While policymakers remain prepared to tighten further if inflation proves persistent, future policy decisions will depend on underlying inflation trends rather than individual data releases,” the bank remarked in a market update, adding that its base case is for the FOMC to keep the federal funds target range at 3.50-3.75% through 2026 and 2027 due to expectations for core PCE inflation to remain stable.
“Resilient US growth, broadening corporate earnings and continued AI-led investment support our constructive outlook for risk assets. We continue to emphasise diversification across the AI ecosystem and expect policy uncertainty and evolving trade developments to create opportunities for active portfolio positioning.”
